Facebook’s first earnings call last week was a big deal. Investors had a lot of questions after the initial IPO and the subsequent decline of the stock. I did an interview with E-Commerce Times on the results. Here is the long version of my analysis.
Numbers: Facebook was able to produce a non-GAAP profit of $0.12 per share and $ 1,184M in revenue. According to GAAP they are reporting a loss of $743M or a loss of $0.08 per share primarily driven by share based compensation expenses that they didn’t recognize pre-IPO. This is all good, though. Facebook made its numbers.
Mobile Strategy: I did like that Mark Zuckerberg discussed the mobile strategy of his company right at the beginning of the call. He acknowledged the importance of mobile for the future of his company. The company is heavily investing in this space. He mentioned that they are working on a deeper integration between Facebook and Apple’s IOS. This is very much needed, because the current Facebook experience on the iPhone is less than stellar.
Making sense of the acquisition puzzle: Two surprising statements. The Instagram-Acquistion hasn’t closed yet. The deal had been announced before Facebook’s IPO in early April 9 2012. The other surprising statement was that Facebook will continue to buy company to acquire talent. This can be truly a very expensive way to hire and even for a company with a 10B war chest it his hardly sustainable.
What to expect going forward: Here is the crux. Facebook’s user base joined the site to connect with their buddies. They want to talk about what’s on their mind, share pictures, stories and goof around. They want to continue to do this for free. That expectation was set the moment they signed up. So, Facebook won’t make money from their audience directly. They need to find ways to make the site appealing for advertising companies.
In the online advertisement space they don’t have the commanding market share we would expect from a site commanding nearly 1B strong audience. Why? It’s very easy to ignore those ads. Hence, the idea to sell “sponsored stories” which are essentially ads in disguise. They appear in the news feed of a user. It makes sense to place these “ads” in the news feed because there they are harder to ignore. However, it’s a thin line. We expect to read news from our friends. Companies are not our friends. If the news feed becomes too “spammy” users won’t go there anymore. They might leave the site altogether. Facebook has to sell to its audience that sponsored stories are cool. A fine balance act.
Then there is the business side of this. Sponsored stories are a new concept at least in the online advertising world. Facebook started just recently to test them out more aggressively. Advertisers don’t understand the value, yet. It’s unchartered territory. Facebook’s has to explain to advertisers why they are different. They have to explain why their ads and sponsored stories are more targeted and consequently more valuable. We are talking B2B selling. The true growth of Facebook sits on the shoulders of his business development organization that has to do educate a skeptical market. This can be tedious and slow. Once again, Facebook has to sell it.
We are past the times when concepts and visions convinced investors to write checks. The stock market is much more demanding. Facebook has a lot of potential. No doubt. Its success depends heavily on the ability of its leadership to pull it all together: The shift to mobile, the user experience that keeps the audience on the site and sustainable monetization strategies. It’s future growth depends on succeeding in unchartered territory while everybody is watching.